Tuesday, October 27, 2009


Pity poor Senator Harry Reid. Not only is he facing an uphill reelection fight in Nevada, but as Majority Leader, he must reconcile the health care reform bills from the Finance and the Health, Education, Labor and Pensions committees so as to attract sixty Senate votes. He’s guaranteed support from the more partisan Democrats, but to attract Democratic and one or two Republican centrists without losing liberals, he has to find ways to deal with two huge problems with the bills—and one giant red herring.

The giant red herring is the public option, THE big stumbling block for reform, mostly thanks to the efforts of lazy-thinking doctrinaire politicians of both parties—especially in the House. (Yes, Speaker Pelosi and Minority Leader Boehner, I mean you.) The reality is that for a public option to provide an adequate network, its payments to hospitals and physicians must be at least at Medicare levels. As experience with Medicare Advantage shows, this means its costs will be close to those of private coverage or higher, especially if it adopts Medicare’s uncontrolled fee-for-service structure and attracts the least utilization-conscious providers and patients. All this makes nonsense of liberal claims that the public option is necessary to control costs, and equally, of conservative allegations that it will destroy the insurance industry—and leaves Senator Reid’s “opt-out” solution looking merely perverse.

Unfortunately, the quasi-religious war over the public option has taken attention away from the two huge real problems with the Senate bills.

Huge Problem #1 is the conflict between mandated coverage and consumer affordability. Even with penalties of $750 or more per person, and with subsidies that limit premiums to 13 percent of income, the Congressional Budget Office estimates that 16 million eligible individuals will fail to be insured. (Rather than paying $4,000 for coverage, a $750 penalty may seem a good risk for someone earning $30,000 a year.) Since those taking the non-insured gamble are most likely to be young and healthy, the result will be a huge adverse selection impact on insurers required to guarantee issue—followed by the giant jump in premium costs that insurers (reasonably, for once) are forecasting.

With the Senate Finance Committee insisting on its approach of grafting more and more new rules onto the present health care system (remember, these are the guys who brought you the United States tax code), is there any way to deal with Huge Problem #1? Aside from big increases in penalties (politically unacceptable) or major increases to the subsidies (unaffordable), possible approaches include exceptions to guaranteed issue for those who fail to acquire coverage (the insurers will like this), allowing buy-in to Medicaid (a better deal than private insurance, so long as you don’t need care), and tying coverage selection to tax return filing (a pre-emptive strike approach that conservatives will erupt over). None of these, however, seems likely to appeal to sixty senators.

Huge Problem #2 is the need to slow the rate of increase of national health care expenditures. The Senate Finance bill assumes that slashing Medicare expenditures is the primary way to do this—ignoring the likely resulting cost shift to private payers. Can we do better? With Democrats unwilling to offend supporters by proposing real penalties for excessively generous employee coverage (unions will fight this) or nationwide tort reform (trial lawyers will resist), or effective limits on provider resources (the Obama administration has cut deals with docs and the drug industry) the best bet ought to be the insurance exchanges. Unfortunately, the Senate bills allow insurers to continue to sell directly to any employer, with all the potential for cherry picking (and resultant adverse selection and ultimate bankruptcy for the exchanges) that this implies. It’s not surprising that the insurance industry has been relatively subdued in its comments on the Senate’s efforts to date.

The sad conclusion: even IF Senator Reid manages to cobble together a reform package that attracts sixty Senate votes AND can be made acceptable to the House, we should be prepared for more of the same: lots of uninsured, skyrocketing premiums, a continuing exodus of providers from Medicare, bigger deficits (remember those premium subsidies), and a series of defeats for the party in power—but the Dems, this time.

Or, perhaps Senate Democratic leaders will suddenly see the wisdom of what CBO Director Doug Elmendorf told them in July: to control the costs of United States health care (and begin to make it affordable to individuals) will take fundamental change.

But don’t hold your breath.

Thursday, October 22, 2009


Hopes for Senate passage of a health care reform bill were further dented last night when the Democratic leadership’s proposal for eliminating the Medicare physician fee reductions required by the sustainable growth rate formula was soundly defeated.

A dozen Democrats and one independent senator joined Republicans in opposing the change proposed by Senate Majority Leader Harry Reid, which would have cost an estimated $247 billion over the next ten years. Backers of the change had hoped that it would be possible to treat the increased costs as a simple addition to the deficit, separate from other health care reform costs, but opponents refused to allow it without offsetting savings or increases in revenue.

The vote sends an ominous message to health care reform advocates: Democratic senators are unwilling to hang together behind their leadership just to facilitate the passage of reform. At the same time, since physician groups had considered passing the “doc fix” vital to their support of reform, it must be assumed that they will now shift more visibly into the opposition camp, making reform supporters’ efforts even more difficult.

Thursday, October 8, 2009


Publication of the CBO’s scoring of the final Chairman’s Mark version of the Senate Finance Committee’s draft reform bill at $829 billion over ten years, while covering some 94 percent of American residents, has given a big boost to Chairman Baucus’ efforts.

The CBO number is rather better than expected, and well below the $900 billion figure set by President Obama as a maximum acceptable amount. The CBO forecast that the draft bill would reduce the federal deficit by some $81 billion over the next decade, also a better-than-expected number, and one that has left Republican opponents struggling to find persuasive arguments against the bill. The CBO also estimated that the deficit would be further reduced over the subsequent decade (starting in 2020) at a rate of between one-quarter and one-half of GDP, as reform-related revenues and savings continue to exceed expansion costs.

A number of caveats are included in the CBO scoring letter and accompanying tables, including the effect of the proposed Medicare Commission’s efforts and that the forecast is based on an “English-language” version of the Finance Committee draft bill, rather than on actual legislative language. Other important cautions not specifically stated are the validity of assumptions about national health trends and the overall economy.

Chairman Baucus has now scheduled a vote on the legislative-language version of the draft bill for Tuesday, October 13. Assuming that the Democratic-majority Finance Committee votes to approve this version, it will then be combined with the version already created by the Senate Health, Education, Labor and Pensions Committee—a process that will involve some fierce horse-trading over inclusion or exclusion of a public option. Meanwhile, House Democrats are working to finalize a single version of the bills that emerged from the three House committees with responsibility for government health care programs—a version that will definitely include a public program option.

Saturday, October 3, 2009


Skeptics (like this blog author) were dumfounded last night when—for the first time in the excruciatingly drawn-out health care reform saga—the Senate Finance Committee came close to meeting a deadline set by Chairman Max Baucus. The deadline—completion of markup of the Committee’s draft bill—wasn’t quite met, but missing it by a mere couple of hours seemed like a major achievement given the more than five hundred amendments that had been proposed.

Of the changes to Baucus’ original draft, most are tweaks, with the most notable being reductions in penalties for non-compliance with the individual mandate (intended to gain support from Senator Olympia Snowe)—along with (thanks to Senator Charles Grassley) a requirement that members of Congress get their own coverage through insurance exchanges.

The next step will be a formal vote next week by the full Finance Committee—with the big question being which way Senator Snowe will go.

And then, the Finance and HELP bills must be merged prior to Senate floor debate—something that will tax Senate leadership, who must struggle to reconcile the public option preferences Absolutely NO versus absolutely YES) of the two committees.

And then, if it survives, the bill faces reconciliation with the House versions…

Thursday, October 1, 2009


In the latest of a long series of optimistic pronouncements, Senate Finance Committee Chairman Max Baucus stated this morning that he wanted to complete markup of the Committee’s health care reform bill “by nightfall” today.

If the Committee were indeed to meet this schedule, the next move would be up to Senate Majority Leader Harry Reid, who would work to combine the Finance Committee and Health, Education, Labor, and Pensions (HELP) Committee bills into a single bill to be brought to the Senate floor for debate, a process that could take weeks, and one that Senator Reid is already shifting recess schedules to allow for.

More realistically (and reflecting Senate Finance’s failure to meet any of Senator Baucus’ previous timing hopes), markup will take at least a couple more days, followed by review of the CBO’s preliminary scoring of the bill, followed by a final Committee vote.

Best guess? A combined bill will reach the Senate floor in two or three weeks’ time, to be followed by a multi-week debate.

Wednesday, September 16, 2009


So, at long last, Senator Max Baucus has released his Chairman’s Mark draft health care reform bill for discussion by the full Senate Finance Committee. The 223-page draft bill is generally consistent with the “Framework for a Plan” document that Senator Baucus issued last week. So, no big surprises. But can it make coverage more accessible and affordable? Can it put the brakes on skyrocketing health care costs? Is it likely to help or hurt the economic recovery?

Accessibility and affordability are the main thrusts of the draft. As with the other Senate and House bills, an individual mandate would be imposed and the insurance market would be reformed to assure coverage on a guaranteed issue basis. Also as with the other bills, Medicaid would be expanded to cover anyone below 133 percent of FPL (but with the federal government picking up more of the tab), while subsidies would be available to other lower-income individuals who buy coverage through an insurance exchange. Additionally, benefit standards would be set for the individual and small group markets, with limits on cost-sharing.

Overall health care costs are the focus of other provisions. The biggest target area is Medicare, where Medicare Advantage “excess payments” would be slashed, a variety of other cost containment measures would be implemented (but not a reduction in physician fees), and a new Medicare Commission would be charged with making cost control proposals to Congress that would be subject to straight-up-or-down votes. Other cost containment provisions are less direct: “overly generous” employee benefits would be subject to a tax to be paid by insurers, while the insurance exchanges are presumably intended to engender price competition.

In terms of the impact on the economy and on taxpayers, the draft is projected to have a ten-year cost of some $850 billion, less than other current reform bills, but with many of its costly provisions deferred until three or more years into the decade. The bill is, however, claimed to be “fully paid for,” with new revenues and savings balancing new expenditures. New revenues would come from insurers and from certain providers, and so would presumably result in higher premiums; others would come from small employers as a result of “free rider” penalties imposed when employees utilize exchange subsidies. The biggest savings would come from Medicare Advantage payment reductions. Large employers would be minimally affected, but some smaller employers would see increases in premiums as a result of new benefit standards—although in some cases these would be partially offset by tax credits.

The political reactions to the Chairman’s Mark have been predictable. Liberal Democrats are distressed that no public plan is included (even though such an option is more likely to increase costs than decrease them), while Republicans have either issued blanket condemnations of the increased federal expenditures (while also criticizing the Medicare Advantage cutbacks) or have focused on hot buttons like abortion and care for illegal immigrants.

A more balanced verdict is that the draft is an uneasy compromise between the political poles. It doesn’t do enough to slow the rate of increase of national health care costs because to do so would result in concerted opposition from both insurers and providers. It doesn’t shift more responsibility for obtaining optimal coverage onto most of the currently insured, because this would alienate employee unions. It doesn’t prevent insurers from cherry-picking the best risks, because this would contradict earlier political promises that “everyone can keep the insurance they have.”

In addition to these “big picture” criticisms, some features are reasonable in intent but seriously flawed as currently proposed.

The penalties to be imposed on those without coverage look to be a classic “gotcha” approach that will have lawyers rubbing their hands in glee as they visualize subsequent court fights. A better approach might be to incorporate coverage selection as part of annual tax filing, permitting a choice of employer coverage, individual exchange coverage, or Medicaid.

The subsidies for low-income individuals above the proposed 133 percent cutoff, combined with Medicaid expansion, are the major reason for the draft’s price tab. With subsidy costs in many cases above Medicaid costs—while still failing to cover total premiums— it would make sense to give lower-income individuals the option of buying into Medicaid.

The almost unlimited latitude for insurers to market directly to groups with the best risks will drive up costs for everyone else and potentially lead to the failure of the insurance exchanges. Instead, insurers should be required to offer their lowest rates to exchange participants, thereby essentially putting all non-ERISA groups and individuals in the same pool.

The multiple benefit options and wide rate range allowed between younger and older insureds seem likely to encourage risk manipulation by insurers and drive up costs for older individuals. Reducing the number of benefit options and shrinking the allowed rate range would simplify choice and enhance affordability.

Overall, the draft moves the debate forward, but perpetuates today’s ineffective and expensive combination of paternalism and the free market. Few employees have many coverage choices, but their “paternalistic” employers have limited interest in tight budget control because of the tax exemption and the assumption that reducing benefits leads to demands for increased pay. Meanwhile, the “free market” for insurers gives them enormous latitude to cherry pick risks and price selectively. Senator Baucus’ draft trims insurer sails somewhat and slightly reduces taxpayer-subsidized employer paternalism—but not enough.

Saturday, September 12, 2009


Politico reports that Senate Finance Committee chair Max Baucus is now promising that his committee’s reform bill will be released on Tuesday September 15.

Since Senator Baucus previously promised, prior to the summer recess, that the “Gang of Six” was already at the point of agreement and would be releasing a bipartisan bill imminently, some caution is indicated about this latest date.

Even more caution is indicated about the level of bipartisan support for the promised bill. On the positive side, the Gang of Six are still meeting and seem to be close to agreement on three sticky issues: malpractice suits, abortion funding (or not), and coverage of both legal and illegal immigrants (or not). On the negative side, at least two of the three Republican members of the Gang of Six (Senators Grassley and Enzi) may have made such intransigent statements during the summer recess that they now cannot support any compromise reform bill without losing political face, while the third Republican member (Senator Snowe) is clearly still undecided.

Wednesday, September 9, 2009


Senate Finance Committee Chair Max Baucus has returned from his summer break with a new proposal for his Gang of Six—the three Democrats and three Republicans charged with negotiating details of the Committee’s reform bill.

Baucus has tried to craft a compromise that will attract at least a handful of Republican votes without alienating his own fellow Democrats. Accordingly, the 18-page proposal, described as “a framework of a plan” excludes the controversial public option and also any direct employer mandate. Instead, it proposes a network of insurance cooperatives, with federal start-up money, and a “free rider” levy on employers whose workers purchase government-subsidized coverage through an insurance exchange.

Other details that reflect Baucus’ attempt to walk the political tightrope include a levy on health insurer revenues and requirements for transparency of insurer costs as a condition of exchange participation, but also more limited Medicaid expansion and less generous subsidies for other lower-income individuals. In addition, a low-cost catastrophic coverage plan would be incorporated, available to those under 25 years old. Together, these provisions are expected to reduce somewhat the total reform cost from earlier estimates.

The Capitol Hill reaction so far seems to be closer to yawns than enthusiasm, with Baucus’ Democratic colleague Ron Wyden quick to point out any final Committee bill would depend on other members also.

Saturday, September 5, 2009


Okay, my apologies to Roy Rogers, but I was pleased to see in the New York Times that the idea of a public plan trigger is finally getting serious consideration by the White House and by Senate Finance Committee members.

I proposed the trigger concept in a piece that ran in The Health Care Blog back in March. It was clear then that a nationwide public plan faced very considerable political obstacles, and I suggested that a more acceptable approach might be to establish a public plan option that would be implemented only where and when private plans failed to meet predetermined cost control targets.

Senator Olympia Snowe proposed the trigger approach to fellow members of Senate Finance some weeks ago, and the NYT reports that the White House—desperate for at least one Republican vote in the Senate—is now analyzing its political feasibility and practicality.

Senator Snowe’s approach, reflecting the situation in her home state of Maine, where the market is dominated by a single insurer, would tie the trigger to affordability, rather than to cost control. This approach has political advantages, but could be labeled as unfair, since it includes a factor that private plans cannot control—individual incomes—in the trigger comparison. It also has the disadvantage of focusing on individuals who are just above the Medicaid income threshold. To achieve affordability for this lower-income group could mean a public plan network virtually identical to that of Medicaid, raising the question: why not just allow this group to buy-in to Medicaid?

However, any trigger is probably better than the nationwide public plan option. It’s also more realistic than Senator Conrad’s proposal for health cooperatives, a concept that has never been successfully implemented (Seattle’s Group Health Cooperative, despite its name, is a Kaiser-type HMO). The experience of Medicare Advantage, in which the private plans with most enrollees cover the basic benefits at lower cost than the government-administered FFS plan, suggests that a trigger approach could provide the best of both worlds. In most areas, especially with real price competition through an exchange, the private plans would compete only with each other, while in those areas in which private plans failed to meet established benchmarks, the trigger would result in public plans being created to provide additional competition.

There is a precedent for a trigger approach. As the NYT points out, the legislation creating the Medicare drug program included a provision for establishing a government drug plan in any area with fewer than two private plans. This hasn’t happened, of course, because competition for Medicare D business has been fierce—and has probably contributed to program costs far below the projections of CMS actuaries.

Saturday, August 29, 2009


One of the effects of the exaggerations, misinterpretations, distortions, and downright lies about Congressional health care reform proposals—mostly from far-right politicians and their hangers-on—has been to deter more objective analysis.

In fact, two key features of the current Senate and House bills—the insurance exchange structure, and the controversial public plan option—need much closer examination, and possibly considerable revision.

FIRST, the insurance exchange structure. It’s a reasonable concept: if insurers were to compete via an exchange for individual and small group business, they would offer highly competitive rates to attract as much business as possible.

Unfortunately, as a Health Affairs blog piece by the former managers of the PacAdvantage exchange makes clear, it isn’t as simple as that. PacAdvantage, which served some 150,000 California small business employees, ultimately collapsed and closed its doors in 2006, a victim of adverse selection. As the PacAdvantage managers explain, having insurers also marketing directly to small groups allowed them to cherry pick the best risks, leaving the less-good risks in the exchange. As adverse selection continued its work, the exchange went into a death spiral with worsening exchange risk leading to higher rates, leading to the least-bad risks leaving the exchange, leading to even higher exchange rates, and so on.

The obvious way to avoid this problem in national reform is to require that ALL individuals and ALL small group employees be included in each regional exchange. Unfortunately, health reforming politicians have adopted “you’ll be able to retain your existing coverage” as part of their reform pitch. It’s understandable, since forcing groups to switch to an exchange is not going to help the prospects of legislation that’s already in trouble, but it instantly opens the door to cherry-picking by insurers, with the prospect of failure of every exchange.

Is there a solution? Rather than imposing an additional mandate on businesses, current bills could be modified to require that all insurers participate in the exchange, and that their exchange rates be no higher than those offered directly to any insured group, thereby forcing insurers to treat exchange and non-exchange insureds as part of the same pool and avoiding the adverse selection effect.

SECOND, the public plan option. So far, the political controversy has focused on the obvious arguments for and against the public plan: it would force insurers to offer better rates, but it could push millions of Americans out of private coverage into a government program.

A close look at data from Medicare Advantage, in which private plans compete with the traditional government option, indicates that both arguments are questionable.

MA’s private coverage alternative is indeed more costly than traditional Medicare, by some 13 percent—more than $11 billion in 2009. However, most of the difference is due to the additional benefits offered. The private plans’ 2009 base bids to CMS—excluding the cost of additional benefits—averaged 102 percent of FFS rates, with HMO and PPO bids averaging just 99 percent of FFS.

These base bid rates include profit and administrative costs, in contrast to the FFS rates which exclude both administration and financing costs. Even the most conservative estimate of these additional costs would put fully-loaded FFS rates above those of the average private plan.

The comparison of Medicare FFS and MA plans is further skewed by the MA bid process. Not only do the ridiculously high “county benchmarks” used in payment setting favor high bids, but the payment formula (which discounts the difference between the base bid and the benchmark, but not the base bid itself) encourages excessive loading of profit and administration into the base bid. In other words, in a more rationally designed competitive environment, average private plan costs should be significantly below those of traditional Medicare.

In terms of the current Senate Health and House bills, with proposed payment rates higher than Medicare, the public plan looks even less competitive. While there would undoubtedly be some who would opt for a government program over a private plan, the vast majority are likely to choose the lower cost option, with the public plan more likely to increase health care costs than decrease them.

Are there compromises that might satisfy liberal politicians’ desires for a public plan? One possibility is to build a “trigger” into the bills that would allow creation of public plans only where private plans fail to meet cost control benchmarks.

Another possibility is to build on the existing public plan for the non-elderly: Medicaid. Congressional committees are already proposing Medicaid expansions, while simultaneously proposing subsidies to make exchange participation more affordable for non-Medicaid eligibles, leading to an anomalous situation in which one family may receive free Medicaid coverage, while a second family whose income is only a few dollars greater is forced to pay a significant part of the exchange premium in order to comply with an individual coverage mandate.

A less costly and unfair approach might be to allow individuals to buy-in to Medicaid. Since average per capita Medicaid costs are approximately $2000, compared with estimated subsidy costs of close to $4000 (based on CBO estimates, in 2009 dollars), this would eliminate both the anomaly and the need for subsidies, with a potential dramatic reduction in the ten-year cost of reform of some $770 billion.

Thursday, August 6, 2009


Five congressional committees and their staffs, plus numerous Obama administration officials, have been working on health care reform for more than three months, with no immediate end in sight. Is health care reform legislation getting closer, or is its likelihood actually receding? What’s the state of play?

In the House, three versions of HR 3200, “America’s Affordable Health Choices Act,” have been passed by the three responsible committees (Ways and Means, Education and Labor, and Energy and Commerce). The Energy and Commerce version differs significantly from the other two in several respects following the refusal of Blue Dog Democrats to support the original version: it reduces Medicare payment disparities between urban and rural areas, it modifies the public plan provision to require that payments be negotiated with providers rather than tied to Medicare rates, and it shifts some of the cost of Medicaid expansion to states. Preliminary CBO scoring puts the ten-year federal cost of the various versions of HR 3200 in the $900-$1,100 billion range, with minimal impact on overall national health care cost trends.

The next step, following the August recess, will be for the full House to debate the various versions and then to vote on a single bill. Given that conservative Democrats have insisted on the public plan payment negotiation provision, while liberal Democrats have been equally vehement in condemning the requirement (and no Republican support is expected for any version), the bill’s fate is uncertain. However, since any possible final legislation will also depend on Senate action (and therefore can be blamed on the other chamber), a compromise seems probable.

In the Senate, a draft bill—the Affordable Health Choices Act—has emerged only from the Health, Education, Labor and Pensions Committee. Generally, this bill follows the pattern of HR 3200 (insurance exchanges, insurance reform, individual and employer mandates). The CBO has estimated that the ten-year federal cost of this bill would be some $600 billion, but this number excludes the cost of Medicaid expansion. (Note that the CBO’s ten-year estimates include only about six years of full implementation.)

The Senate Finance Committee is attempting to craft a bill to attract some bipartisan support, with committee negotiators from the two parties continuing to meet. Whether the negotiators will be able to resolve their differences is far from certain, especially with the Republican members of the group coming under fire from their own party for trying to work with the Democratic majority.

With the House already enjoying the August recess and the Senate also closing down for the remainder of the month, what’s likely to happen next?

A lot depends on Senate Finance. A breakthrough in negotiations there would presumably produce a bill that could attract at least the magical sixty votes (despite their nominal sixty members, the critical illnesses of Senators Kennedy and Byrd make it unlikely that Democrats could produce a filibuster-proof majority without some Republican support). In turn, Senate Finance’s actions will influence House members. A bipartisan Senate bill will likely encourage Blue Dog Democrats to push hard for inclusion of its more conservative provisions in the House bill. Alternatively, failure of Senate Finance negotiations may result in a more liberal House bill, since Democrats will see less reason for compromise. Also, without a bipartisan agreement in the Senate, Democrats may be forced to use the reconciliation process in order to sidestep the need for sixty votes.

Assuming that reform bills do reach the point of a vote in each chamber, what are the chances of passage? It looks like a toss-up. On the one hand, Democrats—liberal and conservative—have expended enormous energy in pushing for reform; failure to pass any reform legislation would be a huge defeat for the party, and a threat that might cause even the most doctrinaire members to compromise. On the other hand, momentum has been lost, opponents are energized, the public is confused, and—given the difficulty of making changes to our complex health care system—health care costs will continue to increase and the number of uninsured will continue to rise for some time even after passage of a bill before any improvement becomes apparent. At least some erstwhile supporters of reform may choose to avoid being blamed for voting for something that is going to take even longer than the economic stimulus to produce results.

Thursday, July 23, 2009


Health care reform looks like it’s stalled. And rightly so, based on the provisions of the House Democrats’ health care reform bill. The grossly misnamed America’s Affordable Health Choices Act (HR 3200) combines the worst of all possible worlds: high taxpayer costs, big increases in federal deficits, and disincentives for businesses to hire, while leaving up to twenty million individuals still uninsured and doing little or nothing to control runaway national health care expenditures.

Although the bill would make health care coverage available to many of the millions who currently cannot afford it, its provisions will potentially add some $200 billion a year to federal expenditures, make only miniscule reductions in Medicare cost trends, and impose play-or-pay provisions and a new surtax that could hurt smaller businesses just as they try to recover from the recession.

So, is there anything that can be done to fix HR 3200 so that it would provide affordable universal health care coverage without increasing federal deficits or halting the recovery from the recession?

The answer is that major changes—some paralleling those in the Wyden-Bennett Healthy Americans Act—are needed in four areas of the bill, those relating to the proposed insurance exchanges, the individual mandate, Medicare, and costs and financing.

The proposed insurance exchanges should be redesigned to maximize the size of the resultant pools and to achieve the benefits of price-competition. Insurers should be required to offer “best value” to the exchanges—with exchange participation a requirement for selling any insurance—to discourage “cherry picking” outside the exchanges through direct marketing to selected employers. Basic coverage should be set by a board independent of Congress to minimize the impact of provider lobbying. Insurers, in turn, should be protected from extreme adverse selection, through exchange-sponsored reinsurance or risk-adjustment. A public plan option should be implemented only in states where insurers fail to control the premium rates offered through the exchange.

The individual mandate should be changed from an after-the-fact penalty for non-insurance—an approach likely to result in both litigation and cheating—to advance selection from a choice of an ERISA-compliant employer plan, participation in an exchange, or a buy-in to a low-cost safety net option tied to Medicaid (the existing public plan). Those failing to make a selection—expected to be primarily the young and healthy—would be automatically enrolled in the safety net option. Premium collection would be simplified by combining it with income tax withholding, as proposed by the Wyden-Bennett bill. Lower-income individuals’ payments would be partially offset by tax credits or subsidies, but these should be tied to the safety net option buy-in rate in order to reduce costs to the federal government.

Medicare payment policy responsibility should be transferred to a board independent of Congress—as proposed by White House Budget Director Peter Orszag, with the grudging concurrence of some Democrats—with payment policy authority covering both rates and controls over some of the more egregious provider profit-maximizing practices.

Federal costs and financing needs should be considerably less onerous with these changes, although allowing buy-in to a safety net option tied to Medicaid implies more demand for already limited resources, so that higher payment rates for scarce providers may be necessary (as provided for in the present version of HR 3200). Although the concept of the play-or-pay mandate is fair in requiring all employers to contribute to the cost of coverage, the “pay” levy should be lower for small businesses. At the same time, two funding sources previously rejected by House Democrats should be tapped: employer-paid benefits above those guaranteed as “basic benefits” and available through the exchanges should be taxed, thereby also discouraging excessive demands for care, while “unhealthy consumption” should be restrained by taxes on certain soft drinks and candy and by higher levies on tobacco and alcohol.

Together these changes would rearrange and simplify the health care landscape, making affordable coverage more truly available while bending the cost curve. Universal coverage would be assured since anyone not making an insurance selection would be automatically enrolled in the safety net option. Issues of payment-avoidance or penalties for non-compliance would not arise, since coverage payment would be part of regular withholding. Major employers’ self-funded arrangements would be left in place, while other employers and their employees would have a new range of competitive options. Market competition would be maximized by the insurance exchanges’ large pools and limitations on cherry-picking and adverse selection. Consumer responsibility would be encouraged by the requirement to make choices of coverage to meet individual needs. Medicare payments and non-Medicare benefits would be freed from political interference. Costs would be more fairly distributed between employers, individuals, and government—without increasing the federal deficit or undercutting businesses’ ability to recover from the recession.

Is it likely to happen? Probably not, any more than the provisions of the Wyden-Bennett bill are likely to be adopted. And the result that we will have to face? A choice between unaffordable “reform” that sabotages the economy, and no reform at all.

Tuesday, July 14, 2009


After some frantic last minute political gyrations and a lot of pressure from the President, House Democrats have announced details of their draft health care reform bill.

Much as expected, the 852-page bill emerging from three House committees would impose a mandate on larger employers to provide insurance, impose a second mandate on individuals to obtain coverage, prohibit medical underwriting by insurers, establish a government-administered public plan to compete with insurers’ offerings through insurance exchanges, offer subsidies to lower-income individuals, and expand Medicaid. The target ten-year trillion-dollar (or more) price tag would be funded through a combination of taxes on high income individuals and reductions in some Medicare and Medicaid payments.

So, is this the answer to the nation’s health care crisis of sky-rocketing costs and growing millions of uninsured?

Probably not.

The bill does make a serious effort to cut the numbers of uninsured. As Massachusetts’ experience has shown, a combination of Medicaid expansion and subsidies for other lower-income folk, combined with mandates on employers and individuals, can significantly increase the numbers of those with coverage. However, this is an expensive approach, as Commonwealth taxpayers can attest. It is also one that is likely to be less effective on a national scale during a recession than when implemented in one wealthy state during better economic times.

Both the employer and individual mandates have weaknesses. The employer mandate, with its option of a modest levy instead of paying directly for insurance, could lead to firms currently providing coverage choosing the less expensive levy, while the exclusion of smaller firms from the mandate could result in restructuring of businesses into multiple pseudo-independent units. The individual mandate suffers from similar weaknesses: penalties may be insufficient to force the young and healthy to obtain coverage, while the application of penalties to only those for whom “affordable” coverage is available provides an obvious loophole.

A big reduction in the number of uninsured with no new controls over costs carries its own risk. As Massachusetts—even with only a modest percentage increase in its covered population—discovered, making health care more accessible means a jump in demand, but with no corresponding increase in supply. The predictable results: higher prices and disenchanted consumers unable to obtain care.

While the House bill’s approach to reducing the numbers of uninsured seems at best problematic—and in which failure to achieve almost universal coverage may undermine attempts to impose restrictions on insurers’ medical underwriting practices—the much bigger failure is the absence of changes necessary to bring health care costs under control.

For larger businesses and their employees, already facing higher than CPI annual premium and out-of-pocket cost increases, the bill provides little help. In fact, the increase in demand for care resulting from expanding coverage is likely to mean—in accordance with normal economic laws—even higher premiums.

For government budgets, the draft bill implies ever-increasing crises. If Medicaid eligibility is expanded to all those with incomes below 150 percent of FPL, the ten-year cost will exceed $500 billion—even assuming implementation is not immediate—to be financed somehow by cash-strapped states and the federal government, on top of expenditures that are already growing far faster than revenues. And while the draft bill includes numerous provisions relating to Medicare, the CBO scoring of an earlier draft concluded that only a $160 billion reduction would be achieved over ten years—a very small bite out of a projected growth in expenditures of over $2.2 trillion (and with the Medicare Trust Fund exhausted by 2017).

Perhaps not surprisingly, the House Democratic leaders in their Capitol Hill announcement chose not to address either the direct cost of the draft bill’s provisions or—the real elephant in the living room—the continued enormous growth in government and private health care expenditures that the bill would do so little to control—and that seem likely to bankrupt us all.

The sad conclusion—notwithstanding the howls from business groups— is that the bill’s Democratic drafters have chosen to duck the really tough decisions (and the Republican opposition has succeeded in being both evasive and intransigent in trying to protect the profit interests of its own financial supporters). So, politics as usual.

Thursday, July 9, 2009


Health care reform ran into new BIG trouble this week with a series of comments from Senate Majority Leader Harry Reid.

On Tuesday, Reid leapt into the middle of reform negotiations, telling Senate Finance Committee Chairman Max Baucus that Democratic leaders had major concerns about the draft Senate Finance bill’s proposed taxation of some health benefits and the exclusion of a strong public plan.

The immediate result was the effective suspension of bipartisan negotiations on the Senate Finance draft, with Republican Senators Chuck Grassley and Orrin Hatch both saying that bill markup would have to be delayed indefinitely until the conflict was resolved.

Yesterday, Reid tried to soften his comments in conversation with Senate Republicans, but later indicated that taxing health care benefits was still unacceptable, leaving Senate Finance members wondering how else to help pay for the trillion dollars (or more, perhaps much more) that they estimate as the ten-year cost of reform.

Reid’s comments reflect the findings of a series of straw polls in which various senators’ constituents were asked if they supported taxing health care benefits (Surprise! They didn’t want any new taxes), as well as an aggressive union-led campaign against the idea.

Reid’s intervention could very well have torpedoed reform. It leaves Senate Finance with few choices for funding reform, and virtually none that are likely to attract any bipartisan support.

What may be even worse is that potentially killing taxation of health care benefits removes from the Senate Finance draft one of the very few provisions that might actually have resulted in some slowing of overall health care cost increases. Leaving tax deductibility of benefits in place will continue to encourage the belief in those who are lucky enough to have generous employer coverage that health care is “free.” Meanwhile, Reid’s insistence on a strong public plan as an alternative cost control mechanism is almost certain to end any support from moderate Republicans or centrist Democrats and to generate huge (and well-funded) opposition from insurers and providers.

Saturday, July 4, 2009


In a THCB comment on my previous post on the Senate Health, Education, Labor, and Pensions reform bill, tcoyote explained some of the political thinking behind what seem like totally spurious cost projections. While I can readily accept tcoyote’s explanation of the pols’ efforts to ignore reality, I’m still innocent enough to want to know what the HELP bill might really cost. So I spent some time looking at the Congressional Budget Office report on the bill.

Here are a few things I noticed:

1. The “ten-year projection” starts in 2010, although the bill does not require insurance exchanges to be implemented until 2014. The result is that the projection includes only six years of reform (plus a lengthy transition period), NOT ten years.

2. The CBO projections include a $58 billion “credit” for the impact of the HELP bill’s proposed new long-term care program (the so-called CLASS Act). However, the “credit” accounts for the difference between premiums and benefits over the 2010-2019 period on a cash basis only. If conventional accrual accounting were used, CLASS would show a net cost for the period.

3. The number of individuals eligible for the proposed Medicaid expansion is projected to be 26 million, not the 20 million implied by Senator Dodd in his news conference on behalf of the HELP Committee.

4. The CBO estimates include no allowance for medical inflation, except in terms of increased subsidies for lower-income exchange participants.

5. The CBO assumption that the absurdly low levy for play-or-pay “payers” will not cause any significant migration from employer sponsorship to the exchanges seems wildly unrealistic (as I’ve already commented).

The bottom line is that a realistic ten-year projection of the costs of the fully-implemented HELP bill plus Medicaid expansion would be somewhere between one and a half trillion and two trillion dollars. (And still with eight million or more uninsured).

It’s disappointing to see the CBO apparently getting suckered into putting a favorable slant on the numbers (Senator Dodd noted that he’d put a lot of pressure on CBO Director Doug Elmendorf). Hopefully, CBO’s subsequent scoring of the HELP Committee’s efforts (along with Senate Finance’s Medicaid expansion) will provide a more realistic picture.

Meanwhile, how about looking at ways to control costs other than the public plan (which as envisioned by the HELP bill will depend on the willingness of providers to participate, at government-set payment rates, potentially creating another version of Medicaid)?

Thursday, July 2, 2009


Key members of the Senate Health, Education, Labor, and Pensions Committee announced on Thursday what they claimed were dramatically improved cost and coverage estimates for the latest version of their health care reform bill.

Headed by Democratic Senator Christopher Dodd, HELP members (in a Muzak-marred conference call with reporters) stated that the revised bill would cost only $611 billion over ten years, a figure apparently computed by the CBO, and that with a further expansion of Medicaid would provide coverage for 97 percent of Americans.

Key features of the bill provided during the conference call included a public plan option, subsidies for lower-income individuals buying insurance through an exchange mechanism, and a play-or-pay employer mandate.

Sounds good? We’ll have to wait for details, but two big problems are already apparent.

The first BIG problem is that the ten-year cost estimate of $611 billion excludes the cost of Medicaid expansion. With Senator Dodd’s admission that the HELP Committee expects this to provide coverage for 7 percent of Americans (the difference between the 97 percent coverage with Medicaid expansion and 90 percent without it), the total cost balloons to far more than a trillion dollars. A rough calculation of Medicaid costs for 20 million Americans at present funding levels gives a total of $80 billion a year – or $800 billion just for Medicaid expansion, presumably to be shared with state governments already on the verge of bankruptcy.

Even assuming that Senator Dodd misspoke, and that he intended his percentages to apply only to under-65 Americans, the ten-year estimate for Medicaid expansion is still over $700 billion—with no provision for medical inflation. And, given the financial condition of most states, most of this cost would have to be borne by the federal government.

The second BIG problem is the absurdly modest levy—$750 for businesses with more than 25 workers and $375 for businesses with fewer than 25—to be imposed on employers not providing employee coverage. It’s hard to believe, in the middle of a deepening recession, that many employers will not choose to pay the $375 or $750 levy rather than buy insurance at $3,000 or more (just for the employee, with no family coverage), with additional government subsidies needed to bridge the funding gap.

The CBO has apparently assumed in its estimates that there will not be a big change in the extent of employer-sponsored coverage over the ten-year period, but this seems unrealistic. While we have not seen a “rush to the exits” in Massachusetts so far, the longer-term experience of Hawaii may be more meaningful. Immediately after Hawaii passed its mandated coverage law, the uninsured rate was below 5 percent, but as a series of recessions hit Hawaii’s economy, the rate increased to 8 percent in 1998, and close to 10 percent today. Only the truly naïve can believe that numerous US employers won’t either choose the far cheaper levy option or—as in Hawaii—find other ways of ducking the employer mandate.

Wednesday, July 1, 2009


Three news stories this week seem to suggest that health care reform is getting closer. Cynics may have some doubts, however.

In the first story, the pharmaceutical industry announced a $80 billion proposal to help pay for health care reform, a proposal that could reduce net reform costs and encourage other provider-side offers to control costs (like a revival of the health care industry’s on-again, off-again $2 trillion offer to President Obama a month ago).

The cynics’ view: This was good PR for Big Pharma, still worried by congressional threats to allow drug importation. However, most of the $80 billion is based on percentage discounts from current prices. Could it be that drug manufacturers might feel that their responsibility to their shareholders will force them to increase prices as soon as the discounts become effective? (And, just maybe, universal coverage might see more drugs being sold?)

In the second story, Wal-Mart – along with the SEIU and the Center for American Progress – announced its support for an employer mandate. Given Wal-Mart’s past unwillingness to offer more than limited health care coverage to just some of its employees, this seemed like a huge change in direction, and one that did much to undercut the US Chamber of Commerce’s opposition to a mandate.

The cynics’ view: Good PR for Wal-Mart, too, to offset earlier criticisms. More to the point, Wal-Mart –which has improved its employees’ coverage after extensive public censure -- does NOT want any form of reform that leaves smaller competitors with no requirement to provide coverage.

In the third story, White House advisor David Axelrod sent clear signals that President Obama would not insist on a public plan option or strongly resist taxing employee benefits, in spite of his earlier statements.

The cynics’ view: The President is so determined to achieve health care reform that he is willing to abandon any of his previous positions. This also means that he can not only leave all the heavy lifting to the Congress, but can divorce himself later on from reform’s problems (which will inevitably happen, regardless of the details of the legislation). So, reform still depends primarily on the Senate Finance Committee’s being able to find a formula that won’t bankrupt us all.

Friday, June 19, 2009


With the Washington insiders at politico.com reporting this weekend that health care reform appears to be in “real jeopardy,” and the Senate Finance Committee so uneasy that they have decided to delay reform bill markup until after the July Fourth recess, it’s increasingly clear that an approach of layering more and more fixes onto the present system isn’t going to work.

In a previous post, I suggested that reform should be guided by seven principles:

1. Affordable basic benefits
2. Fairness of tax treatment
3. Price competition without “cherry picking”
4. Individual choice, individual payment responsibility
5. Restrictions on monopolies
6. Realistic funding
7. Freedom from politics

With these as a starting point, this may be a good time to look again at Senators Wyden and Bennett’s Healthy Americans’ Act.

The Wyden-Bennett bill is unique in two respects: it is co-sponsored by Democrats and Republicans, and it doesn’t assume that major changes can’t be made to our present way of financing health care.

The bill doesn’t completely match the seven principles, but it does some critical things:

1. It establishes community rated basic benefits, with a ban on medical underwriting.

2. It levels the playing field for all Americans by eliminating the tax exemption for employer-paid insurance.

3. It moves the responsibility for choosing—and paying for—coverage to those who will use the care, but provides subsidies for the lower-income, as well as tax deductions to offset premium costs

4. It provides real competition among insurance plans, including plans offered by employers, and specifically bans insurer “cherry picking” of the best risks.

5. It mandates universal coverage, while limiting taxpayers’ liability.

6. It changes Medicaid into a wrap-around program accessing the same insurers as other individuals, potentially reducing some of the financial burden on states, and eliminating the “Medicaid program stigma.”

The bill is not beyond criticism, but anyone reading Senator Wyden’s speech on the Senate floor this past week on the challenges of health care reform, will be struck with how much closer he seems to be to addressing the key issues than the proposals that have been emerging from various congressional committees over the past month.

Thursday, June 18, 2009


The current congressional approach to health care reform of adding ever more fixes without changing the underlying system looks increasingly shaky.

What are the some of the indications?

1. The public plan has generated enormous opposition—and not just from insurers. Whether anyone believes that a Medicare clone would reduce under-65 health care costs or not, it is unlikely that a final reform bill will include anything other than a weak compromise.

2. The health care industry “promise” of $2 trillion in savings was withdrawn almost as soon as it was made. Only the truly naïve believe that the industry would willingly reduce its revenues.

3. Employer mandates face a “heads we lose, tails they win” dilemma. Mandating that every employer pay a substantial part of employee premiums won’t fly, but imposing only a nominal levy on non-payers will result in many employers abandoning existing coverage.

4. Individual mandates face the same problem as for employers. They may work where pre-reform uninsured numbers are low, but imposing them on states like Texas and Florida with more than 20 percent uninsured looks overwhelmingly difficult.

5. The Congressional Budget Office analysis of the draft Senate Health, Education, Labor, and Pensions Committee bill estimates that it would cost more than a trillion dollars over ten years and still leave 37 million Americans uninsured.

The shakiness of the present congressional approach was underlined this week by CBO Director Doug Elmendorf. In a letter to Senators Conrad and Gregg, Elmendorf emphasized: “large reductions in spending will not be achieved without fundamental changes in the financing and delivery of health care.”

And that’s exactly the issue.

If we want to achieve something close to universal coverage without bankrupting the nation (although this may happen anyway, without health care reform), we have to rethink our approach.

So here are seven principles to consider:

1. Affordable basic benefits – Everyone should be guaranteed basic coverage, but we can’t afford Cadillac-level (or possibly even FEHBP-level) insurance. Ultimately, funding availability must dictate basic benefits, not the reverse.

2. Fairness of tax treatment – Employers should have the option of providing supplemental coverage, but this should not be subject to an inequitable tax exemption, available only to some.

3. Price competition without “cherry picking” – As in other industries, competition should be fostered by transparent pricing of basic benefits (e.g. through an insurance exchange), with supplemental benefits separately priced. Insurers should be restricted from selling directly to employers whose employees are able to buy coverage through an exchange.

4. Individual choice, individual payment responsibility – With the exception of existing government programs and self-insured groups (which, with no insurer risk or profit involved, are assumed to provide better value), individuals should have the responsibility for choosing coverage that best meets their needs and, subject to subsidies for the lower-income, their budgets.

5. Restrictions on monopolies – There should be effective constraints on insurer monopolies, as well as on provider monopolies in which specialists in an area group together to control prices.

6. Funding – Just as with Medicare and Social Security, there should be specific guaranteed sources of funding for basic benefits, rather than continuing to rely on the goodwill of employers and the financial abilities of individuals.

7. Freedom from politics – As proposed by Tom Daschle and others, health care policy should be set by an independent board. Consideration should also be given to moving Medicare payment policy to the same board.

The Senate Finance Committee’s decision this week to delay reform bill markup until after the July Fourth recess is a strong indication of their own unease with the current direction of reform. Perhaps they could use the holiday to consider these principles.

Tuesday, June 16, 2009


Can price competition cut health care costs? There are lessons to be learned from the airline industry.

Over thirty years, per capita health care costs, adjusted for inflation, have increased two and a half times. In the same period, despite a doubling of fuel prices, airline fares have fallen by more than half.

Why the five-fold disparity?

It’s obvious the two industries have followed very different paths. While airline travel has become an experience of packed planes, crowded airports, and peanuts (or less) meal service, health care has seen dramatic advances. Treatments that a few years ago seemed unimaginable are now commonplace: heart transplants, anti-depression drugs, artificial joints, laparoscopic surgery using miniature television cameras, and—of course—Viagra.

That’s only part of the story, though. While air travel is now safer and more convenient, with more frequent flights to more destinations, health care in some communities is so inadequate that morbidity and mortality rates are comparable to those of third world countries.

Why have airlines been apparently so much more successful in giving value for money?

Led by Southwest, the airlines that sprung up after deregulation recognized that individual flyers were price-sensitive, and cut their costs accordingly. They faced barriers, though, many of them analogous to those in today’s health care system. Business travelers flying on their employers’ nickel resisted efforts to move them to crowded peanut-only flights, frequent flyers resisted having to switch from their favorite mileage plan to that of another airline network, and travel agents much preferred to send their customers on airlines paying higher commissions.

Southwest and its peers succeeded by marketing directly to the public, through relentless emphasis on lower fares, and by maintaining standards that were, if not luxurious, acceptable to travelers. Few businesses are now sympathetic to employees’ preferences for more comfortable higher-cost flights, frequent travelers have adapted to low-cost airlines’ mileage programs, and travel agents and their commissions are almost a thing of the past.

And now, just as Southwest Airlines travelers found that they reached their destinations as reliably—if not quite as comfortably—as before, so recent studies have shown that there is little or no relationship, within the range of acceptable medical standards, between health care costs and quality.

So, what must health care reform do to emulate Southwest Airlines’ effect on fares?

First, just as deregulation ended most legacy airlines’ government subsidies, the tax exemption for employer-paid insurance should be reduced or eliminated. Not only is the $300 billion a year tax subsidy needed to help pay for reform, but cutting the exemption will discourage overly-generous coverage and remove the inequity between employer-paid and individual-paid insurance.

Second, just as travelers can compare airlines’ fares for the same itinerary using Orbitz or Expedia, insurers should be required to price the same basic benefits, perhaps through insurance exchanges. Supplemental benefits could be offered and separately priced, but being able to compare prices for the same basic coverage is essential.

Third, just as individuals purchase most airline tickets, so individuals should be responsible for choosing insurance to meet their own needs. In practice, this implies subsidies for the lower-income, and perhaps also some form of voucher model to facilitate the process. It may be appropriate, also, to allow self-insuring companies to continue to provide employee coverage since, with no insurer risk or profit involved, they typically provide better value.

Fourth, just as airlines’ pay is negotiated only with their own unions—not every other union in each airport—so there should be more effective constraints on provider monopolies in which specialists in an area group together to control prices.

Emulating Southwest Airlines won’t result in the cost of health care falling by half, but it offers a far more promising approach to cost control than the expensive band-aid solutions, superimposed on the worst features of our present system, apparently preferred by congressional committees.


The Senate Health, Education, Labor, and Pensions Committee’s 700-page draft reform bill ran into unexpected trouble today with the release by the Congressional Budget Office of a preliminary analysis of the bill.

According to the CBO, the HELP bill—as currently drafted—would cost more than a trillion dollars over ten years, but leave as many as 37 million still uninsured.

The CBO analysis found that while subsidies proposed by the bill would make insurance more affordable for many, with some 39 million individuals moving to insurance exchange coverage, 15 million would lose their employer-sponsored coverage and another 8 million would leave government programs.

Responding to Republican criticisms, Senate Democrats emphasized that the bill was still a work in progress, and that the draft reviewed by CBO did not include any form of employer (or individual) mandate, or a public plan, or an expansion of Medicaid. Collectively, these would be expected to substantially reduce the number of uninsured, but could also increase the total cost.

Monday, June 15, 2009


HHS Secretary Kathleen Sebelius was in first-class waffling mode on CNN on Sunday, telling John King that the United States is not ready to mandate that every individual have health care coverage, but—in true politician speak—that a mandate might work if “the rules” were changed, thereby carefully not closing the door on the concept.

Since AHIP has stated that its agreement to eliminate medical underwriting and guarantee issuance is dependent on everyone having insurance, Sebelius may have few choices. Either health care reform must include an individual mandate, or it must create essentially an entitlement program like Medicare (as in Fuchs and Emanuel’s proposal). Any other solution gives AHIP an excuse to back out of their agreement.

Thursday, June 11, 2009


If health care reform legislation is passed, it will almost certainly include provisions for insurance exchanges. Theoretically, these could be key to controlling costs and expanding access to coverage. In practice (and in addition to assumptions about guaranteed issuance, community rating, and the elimination of medical underwriting) these goals will be achieved only if exchange design adheres to five basic principles:

1. Exchanges must be the only source of private coverage for individuals and small businesses.

Without this rule, insurers will be free to “cherry pick” the best risks, abandoning the less attractive to the exchanges and driving up the costs of exchange coverage. Conversely, a very large “unselected” exchange pool will reduce insurers’ risks, enhance competition, and result in lower premiums. Ideally, if we are really serious about maximizing price competition, all but self-insured and other large employers should utilize the exchange.

2. Insurance choices should be made by individuals, not employers.

Employees (and other individuals) are likely to be wiser consumers of care they have chosen to fit their own needs. In contrast, employer choice will tend to result in a “one size fits all” approach, increasing costs for the young and fit and possibly creating dissatisfaction among the less healthy, and potentially requiring employees changing jobs also to change providers—thereby disrupting continuity of care—as they switch to new insurers’ networks.

3. Exchange offerings must separately price basic benefits and any supplemental coverage.

The key to price competition is to have comparable products explicitly priced. Allowing insurers to offer differing benefits will undermine consumers’ attempts to determine best value. However, to avoid instability of enrollment that could result from large numbers of enrollees switching to a new lowest bidder at annual enrollment time, basic benefits below the median price should be listed at the median.

4. Exchanges should be state-based.

While state-based exchanges imply some administrative duplication, they offer three potential advantages. They would facilitate oversight of participating insurers, they would make possible the use of a state “trigger” to implement some form of public plan if insufficient or ineffective insurer competition is available, and they would allow subsequent optional inclusion of Medicaid eligibles.

5. Exchanges should protect insurers against the effects of adverse selection.

Insurers will not willingly participate in an exchange system that guarantees issuance, without protection against high-risk or high-cost individuals. This means that the exchange design must include either exchange-sponsored reinsurance or some form of risk adjustment.

So, are we likely to see reform legislation that includes insurance exchange design that adheres to these five principles?

Unfortunately not, based on what appears to be the reform approach being taken by congressional committees—applying a massive series of band-aids to the present system. And unfortunately not, if exchange design mimics that of their prototype, the Massachusetts Connector, which takes the same approach. If the only draft bill that has emerged so far from committee (Senate Health, Education, Labor and Pensions) is any guide, reform will replicate many of the worst features of Massachusetts’ system, allowing insurers to continue to market whatever they want to whomever they choose, and leaving the insurance exchange as the coverage source of last resort for those few who fail to be marketing targets for insurance salesmen.

The result? A triumph for the insurance industry—but not for consumers.

Tuesday, June 9, 2009


Two big political battles are going on in Washington over details of health care reform. With more to come.

The public plan fight continues to dominate health care policy news, and was fueled this past week by a letter from President Obama, to Senate committee chairs Baucus and Kennedy, expressing his strong support for a public plan option.

How to pay for reform is the second and more fundamental fight. With current cost estimates of a trillion and a half dollars over ten years, and the President promising revenue neutrality, the pressure is on to find a credible and acceptable combination of savings and new revenues.

Both these fights continue to generate visible heat with television commercials from conservatives attacking the public plan (“the government is going to control your medical care”) and unions attacking proposals to tax health benefits (“the government is going to slash our paychecks”). Neither issue will be settled soon, although much of the public plan controversy is political posturing, with a compromise approach (for example, applying a trigger to the plan, as I suggested in a post some weeks ago) seeming most likely.

The next battle—also anticipated in the President’s letter— is likely to be over coverage mandates, imposed on individuals or employers or both.

There were hints of the upcoming clash in recent comments by Senator Baucus, in which he estimated that only 94 to 96 percent of Americans would be covered under reform, then was forced later to amend his remarks to “as close [to 100 percent] as we can.” The gap between Baucus’ two estimates could be critical, since health insurers have agreed to eliminate medical underwriting only if universal coverage is achieved—and mandates are the obvious approach.

Whether imposed on employers or individuals, or both, mandates will be a political hot potato. Small businesses will fight a play-or-pay mandate, while conservatives will battle any attempt to require individuals to carry a prescribed level of insurance. The bigger problems are likely to be more practical than philosophical, though.

To appease small businesses, an employer play-or-pay mandate will have to involve only very modest “pay” requirements (as in Massachusetts) and perhaps exclude the smallest employers (also as in Massachusetts). The first would put a hole in reform funding, the second could threaten the universal coverage goal.

Individual mandates face other problems. Tying them to income tax filings will not make them more attractive, and will raise questions of how to determine compliance, what penalties to impose for non-compliance, and how to relate a retroactive process (tax filing) to a current requirement (insurance coverage). States like California and Texas, with far larger numbers of uninsured than pre-reform Massachusetts, will present particular difficulties in requiring individuals to obtain coverage.

Together these difficulties imply an inherently weak and “leaky” system, with many individuals failing to be covered, in turn leading to insurers backing away from their promises of guaranteed issuance and elimination of pre-existing condition exclusions, and to higher costs for those who do have insurance—in other words, perpetuating today’s big problems.

An alternative to mandates is some form of tax-funded voucher, with funding shared by employers and employees. The Wyden-Bennett Healthy Americans Act proposed a version of this, while the concept of shared employer-employee levies that guarantee benefits is common to Medicare and Social Security. Guaranteeing coverage to everyone who files a tax return is simpler administratively than a mandate-penalty model, would spread costs more equitably, and would reduce insurance risk.

As in the Wyden-Bennett bill, a tax-funded voucher model could allow exceptions for self-insured or other large businesses. It could also—if employer tax payments are tied either to revenues or net income—similarly allow exceptions for non-profit and governmental entities. Otherwise, the model is vastly simpler and results in lower insurer risk and enhanced price competition.

The concept of a health care “tax” is obviously politically unappealing, but only the most naïve will believe that a mandate is much different in its effect. The issue that congressional health reform designers should be considering is whether pretending that mandates are not taxes—and so can be sold somehow to the American public—is worth risking health care funding viability and universal coverage.

Monday, June 8, 2009


It’s hard not to be impressed.

The effort to enact national health care reform legislation has become a massive political crusade.

Starting even before the 2008 election, dozens of Senate and House committee members, along with scores of congressional and administration staffers, have been working to identify elements of a reformed health care system. A parade of experts from academia, business and the health care industry have testified before congressional committees. Senate and House and administration staffers have developed hundreds of pages of proposals for change. The Congressional Budget Office has weighed in with its own hundred-plus options for improvement. Thousands of hours have been spent in meetings in Washington and across the country to consider what reform might look like. And now President Obama is becoming increasingly personally involved.

So, why might the end result be a disappointment?

The staff issue papers from the Senate Finance Committee and the Senate Health, Education, Labor, and Pensions (HELP) Committee provide a clue. Three hefty papers from Senate Finance spell out in a hundred and fifty detailed pages scores of possible changes to our present system, while Senate HELP has released its own dozen-page issue paper and is circulating a 171-page draft bill.

The focus in each issue paper is on repairing what (in the opinion of the authors) is wrong with today’s system. In fact, the HELP Committee paper is subtitled “Strengthening What Works and Fixing What Doesn’t.What’s missing? Not one of these papers provides a vision of what we’d like our health care system to be—the system we’d like to have if we could forget some of our current dysfunctional model.

Why is such a vision so important? Without it, like physicians treating a sick patient without ever having seen a healthy one, we run the risk of just applying band-aids to something fundamentally diseased. We’re not going to get our ideal system—there are too many entrenched interests to allow that—but starting the design process by defining what we want is essential to creating a system that does more than just limp along until the next crisis hits.

It’s not that such visions can’t be found, even ones that retain the traditional roles of insurers, business, consumers, providers, and government. The Dutch health care system is a prime example of a cost-effective universal coverage system. Nearer home, Fuchs and Emanuel have proposed a comparable system, but with radically different financing. Senators Wyden and Bennett have written a bill that includes similar elements. The common feature of each of these is a simple cohesive competitive approach –not a multiplicity of discordant elements patched together in an attempt to please as many constituencies as possible.

There are other perils to the Senate Finance and HELP committees’ starting-at-the-wrong-end approach. The more complex the system—and imposing layer on layer of band-aid repairs will make it very complex indeed—the more opportunities there will be for manipulating it. If there’s one thing we’ve learned, it’s the health care system balloon effect: squeeze costs in one area and they are likely to explode in another.

There’s another problem with the band-aid approach. Complexity is a hard sell to the public.
As the Clinton administration discovered, the more complicated reform becomes, the less likely it is to gain public support. Sadly, there are few signs among the various congressional papers that the authors understand this. The 150 pages of detailed proposals from Senate Finance for “fixing the system,” but leaving almost every present feature in place, epitomize the problem (perhaps not surprising given that these are the folk who brought us the United States tax code) but hardly give hope for a cost-effective future for American health care.

Saturday, June 6, 2009


The past couple of days have seen some of the veils lifted from congressional health care reform proposals.

In the Senate, the Health, Education, Labor and Pensions Committee is now circulating a 171 page draft of its proposed bill. In the House, the Energy and Commerce Committee (one of three House committees with health care legislative responsibilities) is close to releasing its own version, with some details already being publicly discussed.

Neither bill contains big surprises (although both include proposals certain to infuriate various groups), and neither deals in any detail with reform funding issues.

The Senate bill, from the ailing Senator Ted Kennedy’s HELP Committee, includes the expected public plan provision—an expansion of Medicare, but one in which providers would be paid ten percent above standard Medicare rates—along with requirements for individuals to have insurance (with subsidies for lower-income individuals) and for businesses to provide employee coverage or pay a fee to the government. The bill provides standards for guaranteed issue and rating of insurance, and provisions for helping states establish insurance exchanges (referred to as health benefit gateways). It also proposes expansion and some standardization of Medicaid, and provides for a new long-term care program, Community Living Assistance Services and Supports (under the heading of the CLASS Act!).

The House bill, from Representative Henry Waxman’s committee, is expected to include many provisions similar to those of the HELP bill, including requirements for individuals to purchase insurance and for employers to help cover the cost, for establishment of insurance exchanges, and similar insurance market rules to the HELP bill. The big unknown—until a draft becomes available in the next few days—is the approach to a public plan.

An equally big unknown is the shape of the draft Finance Committee bill, with Democrats and Republicans still battling over the public plan issue, but other details (insurance market reform, individual and employer responsibility, insurance exchanges) looking likely to parallel the other bills. The even bigger question, though, for Senate Finance is: how to pay for it all?

Sunday, May 31, 2009


Politico.com this weekend includes news of what it describes as Senator Ted Kennedy’s “reemergence” in the debate on health care reform with proposals that are distinctly to the left of those of Senate Finance Committee Chairman Max Baucus. It also includes the staff working paper being circulated among members of Kennedy’s Senate Health, Education, Labor, and Pensions Committee, and which presumably reflects Kennedy’s positions.

The Politico report and a parallel piece in the New York Times both emphasize significant policy differences between Kennedy and Baucus. The writers of the two pieces stress Kennedy’s liberalism and Baucus’ more moderate (or conservative, depending on one’s viewpoint) policies. The New York Times article focuses on the inclusion of a public plan as the key difference between the two senators, and notes Baucus’ committee efforts to develop compromises with ranking Republican Senator Chuck Grassley, which would presumably move the Senate Finance bill further to the right. So, what’s the truth?

Comparison of Finance Committee comments with those of the HELP Committee working paper does show differences, but in most cases these are ones of nuance. Much of the working paper reads like a campaign manifesto, and is correspondingly vague about details—and silent on financing. (What are “reasonable limits” for premium variations? Is there any real evidence of the effectiveness of “medical homes”?) On the other hand, it is also quite comprehensive in scope, including a major section on long-term care, something that has been almost totally ignored in the reform debate.

The HELP paper does call—as reported by Politico and the Times—for creation of a public plan. However, no specifics are provided, and the words used could be as applicable to the “weak” models suggested by Senator Charles Schumer and the New America Foundation’s Len Nichols as to the “strong” Medicare-based models suggested by liberals.

The conclusion: obviously there are differences between Senators Kennedy and Baucus and between their respective committees, (notwithstanding the two senators’ latest joint announcement but there is certainly no deal-breaker at this point.

Friday, May 29, 2009


Things have been quieter on the health care reform front this past week, as the two biggest current fights—over the public plan proposal and over taxation of health care benefits—moved behind closed doors on Capitol Hill.

Both of these fights are still generating visible heat—literally visible, in fact—with television commercials from conservatives attacking the public plan (“the government is going to control your medical care”) and unions attacking the proposal to tax health benefits (“the government is going to slash our paychecks”). Neither issue will be settled soon, and either could derail reform permanently.

There are more battles coming, too, as lobbyists for insurers, drug manufacturers, providers, businesses and unions try to fight off any proposal that might curtail their incomes.

The next one is likely to be over coverage mandates, imposed on individuals or employers or both.

There were some hints of the upcoming clash in recent comments by Senate Finance Chair Max Baucus. In a breakfast meeting sponsored by the Kaiser Family Foundation, he estimated that only 94 to 96 percent of Americans would be covered by the reform model he expected, then was forced later to amend his remarks to “as close [to 100 percent] as we can.” The gap between Baucus’ two estimates could be critical, since AHIP has publicly agreed to eliminate medical underwriting only if universal coverage is achieved—and a mandate is the obvious way to do so.

Whether imposed on employers or individuals, or both, coverage mandates will be a political hot potato. Small businesses will fight a play-or-pay mandate (and one that they are willing to accept may leave a big hole in reform financing), while conservatives will undoubtedly battle any attempt to require individuals to carry a prescribed level of insurance. An individual mandate may have been—for the moment, at least—successful in Massachusetts, where the percentage of uninsured was low, but it will present severe problems in states like California and Texas, with very large numbers of uninsured who would be expected to contribute towards coverage.

Mandates also face other problems. Tying them to income tax filings—as Massachusetts has done—will not make them more attractive, and will open up questions of how to determine compliance, what penalties to impose for non-compliance, and how to relate a retroactive process (tax filing) to a current requirement (insurance coverage).

Given these difficulties, an alternative that may get more attention is some form of voucher, as suggested by Fuchs and Emanuel. While the VAT levy that they proposed is almost certainly not politically viable as a funding mechanism, building some part of the coverage cost into the tax system, as in the Wyden-Bennett Healthy Americans Act, might gain support. From an administrative viewpoint, guaranteeing coverage to everyone who files a tax return is simpler than a mandate-penalty model, and could be more politically acceptable.

What’s clear is that insurance system stability depends on getting very, very close to universal coverage, and that either an individual mandate (most likely combined with an employer mandate) or a quasi-voucher system is the only way to get there.

Wednesday, May 27, 2009


It turns out that the hospital, insurance and pharmaceutical organizations who announced with great fanfare a couple of weeks ago their plan to cut/maybe think about cutting* $2 trillion/maybe nothing* from their costs may have been even more devious/disingenuous/stupid* than was apparent at the time. [*choose one]

The New York Times points out today that any such organized effort to reduce prices could face antitrust charges. In the Times’ words: “Antitrust lawyers say doctors, hospitals, insurance companies and drug makers will be running huge legal risks if they get together and agree on a strategy to hold down prices and reduce the growth of health spending.

The drug manufacturer lobbyists who so eagerly participated in the May 11 meeting with President Obama, when the cost-cutting promise was made, should have been especially aware of the issue. Back in 1993, it was their trade group that, in an effort to soften the threat of Clintoncare, offered to limit pharmaceutical price increases to the CPI rate, then were told by the Justice Department that this would violate antitrust laws.

And, again according to the Times, it was the AHA who complained recently to the Federal Trade Commission that antitrust laws make it difficult for providers to collaborate and lower costs.

So, first these organizations promise to cut costs by $2 trillion, then they say they didn’t really mean it, and now it turns out that it would probably be illegal (which they should have been fully aware of, anyway). Who’s trying to fool whom?

Monday, May 25, 2009


At a time when too many political staffers and ivory tower academics are presenting themselves as health care experts, it’s a pleasure to read the words of someone who actually has the expertise to justify the term.

Dr Jaan Sidorov writes a terrific health care blogthe Disease Management Care Blogfocusing primarily on disease management, but also ranging across much of the spectrum of health care policy.

Two things set Dr Sidorov’s blog apart. First, he has real world experience—including serving as Medical Director of the Geisinger Health Plan, where he initiated Geisinger’s disease and case management programs. Second, he writes one of the most literate—and often witty—columns in the blogosphere. If you want to track what’s really working or not working in the area of care coordination and disease management, or just get a different view of the health care world, take a look at DMCB.


One of the continuing themes of the health care reform debate over the past weeks has been the opportunity for cost savings in treating the chronically ill.

It seems like a no-brainer. Close to 90 percent of Medicare spending is for just 25 percent of beneficiaries, with almost half of the expenditures due to the top five percent of those covered. Three quarters of these high-cost patients suffer from multiple chronic conditions, with the number of physicians involved in a patient’s treatment typically more than the number of conditions. So, efforts to manage and coordinate care should show significant savings, right?

Not so, if the federal government is involved. A MedPAC report summarizing the results of four Medicare chronic care demonstration programs concluded: “Costs: Little evidence of cost neutrality or savings…Quality: Scattered evidence of success improving process, satisfaction, outcomes…”

None of this bodes well either for further chronic care demonstrations or for the great white hope of many Medicare policymakers: the medical home model, with—as defined by CMS—twenty-eight specific capabilities including electronic medical records, care coordination, treatment planning and reporting.

Aside from the lack of success so far, why should we be skeptical about savings from care coordination in Medicare? There are two simple answers.

First, the process of demonstration and evaluation is so lengthy that—even when an approach can reduce costs—general implementation may not occur for years.

Second, in order to encourage providers to participate, CMS has discovered that additional payments are necessary, thereby eliminating most or all the potential savings.

The attitude of physician organizations is clear. In announcing their support of the medical home model, the American Academy of Family Physicians (AAFP), the American Academy of Pediatrics (AAP), the American College of Physicians (ACP) and the American Osteopathic Association (AOA) demanded: “additional reimbursement for participating practices to adequately compensate for the increased physician and administrative staff time necessary to provide care…” In other words, if you want us to do things right, you’ll have to pay us more.

Monday, May 18, 2009


Over the past three weeks, a procession of health care experts have wended their way to the halls of Congress to testify before the Senate Finance Committee. Collectively, the testimony (available on the Senate Finance website) looks at almost every aspect of health care reform. There’s plenty for any one person to disagree with, but—overall—it’s like having a free subscription to Health affairs.

If one had to pick just one paper to read, an excellent choice would be Len Nichols’ testimony on expanding health care coverage. It’s better written than most of the others, and far more objective than the self-serving comments from industry insiders. Here are my own comments on Nichols’ recommendations:

1. Elimination of the employer coverage tax exemption – Not only is it probably key to financing reform, it removes the unfair advantage that large employers have over small ones, and also potentially moves coverage choice and payment to those who will actually be covered. Allowing ERISA and other large employers to continue to offer direct coverage is a reasonable compromise, and one that would reduce the risk of destabilizing the insurance industry (and alienating big business). It’s also consistent with the successful Dutch system, which uses an insurance exchange model but allows large employers to contract directly with insurers.

2. Separate pricing of a minimum benefit package – I think this is essential, and I would much prefer to see price competition based on fixed benefits than benefit competition based on a fixed budget (as Fuchs and Emanuel have suggested). I don’t see how we can be confident about controlling costs if purchasers can’t see which choices are less expensive. Models like FEHBP that offer different benefits at different prices are the worst possible combination.

3. Risk adjustment – We clearly have to have some form of this, and again the Dutch system offers an example (as does Medicare Advantage – hah!). However, I wonder if a reinsurance approach might be simpler.

4. Play-or-pay – Eliminating the employer coverage tax exemption would remove the need for play-or-pay, which has inherent problems of unacceptability to smaller employers and also is liable to manipulation (Hawaii’s employer mandate is a good example of how this kind of approach can be finessed to a point at which it is meaningless).

5. Medicaid – Not only do we have a separate health care program for the poor, it’s one that too often limits access to care. It may not be politically feasible currently, but turning Medicaid into a wraparound subsidy program (as the Wyden-Bennett Healthy Americans Act proposes) would also achieve continuity of care.

6. Medicare – It’s essential that we wring some savings out of Medicare, but I’m not hopeful about the Finance Committee staff’s proposals for using payment changes to make delivery systems more efficient. So far, it hasn’t worked in the chronic care demonstrations and I’m always skeptical about CMS’ ability to make things happen. The one essential change is neutrality between Medicare Advantage and FFS, and this would be even more effective in terms of cost control if MA savings were shared with beneficiaries directly as offsets to Part B premiums.

7. Public program option – The self-funded state employee program option is a reasonable compromise. An alternative that I’ve proposed is a combination of a trigger (the public plan is only implemented in certain circumstances) and the availability of public plan payment rates to all private plans (in effect, a PPO-for-all).

It would be nice to think that common sense and experience will trump industry lobbying and political timidity, but meanwhile it’s a pleasure to read such a thoughtful and articulate paper as that of Nichols.

Sunday, May 17, 2009


Putting the political cart firmly before the horse, the Senate Finance Committee heard testimony last week on how to pay for reform—before they had reliable estimates of how much it is likely to cost.

It’s not that there aren’t plenty of estimates to choose from. A recent Associated Press report offered ten-year forecasts ranging from “the president’s $634 billion…is likely to be the majority of the cost” (White House budget director Peter Orszag) to “$125 billion to $150 billion a year” (New America Foundation economist Len Nichols) to “$1.5 trillion to $1.7 trillion would be a credible estimate” (Lewin Group consultant John Sheils). Take your pick.

What’s really the number that Senate Finance members must find a way to fund?
Leaving aside mythical savings like the $2 trillion sort-of promised by health care industry bigwigs, and the almost as questionable cost reductions for delivery system tweaks offered at previous Senate Finance sessions, the question becomes: how much new spending will universal coverage add?

Despite the willingness of numerous experts to offer estimates, only one detailed study has been published. Urban Institute researchers projected in 2008 that additional spending would have been $122 billion, in 2008 dollars, if universal coverage had been in place in that year. At current health care cost growth rates, this would equate to $135 billion in 2010 and a ten-year estimate of close to $1.5 trillion, both in 2010 dollars.

But could this number be too high?

Maybe. Here are some reasons:

1. The Urban Institute study projected a total of 54 million uninsured in 2008. The Census Bureau CPS estimate for 2007 was 45.7 million. The current CBO estimate for 2009 is 45 million. Using the lowest of these estimates would reduce the ten-year cost projection to $1.25 trillion.

2. The Urban Institute study assumed that the newly-insured would be split between public and private insurance in the same ratio as lower-income individuals already with coverage. If reform were based on private coverage expansion, the ten-year estimate could fall by another $250 billion, to around $1 trillion.

3. A combination of the effects of insurance exchange price competition and some taxation of employer-paid benefits could further reduce the projection, perhaps by another $100-200 billion.

Unfortunately, the Urban Institute estimate could also be too low:

1. Continuation of the recession combined with possible CPS undercounting could put the actual number of uninsured close or even above the number projected by the Urban Institute. (This would be consistent with Massachusetts’ reform experience of the actual uninsured count proving to be significantly higher than estimated by state analysts.)

2. The Urban Institute study did not include the underinsured, estimated to be as many as 16 to 25 million, who might be expected to incur additional costs if they had better coverage. (Both estimated counts are from Commonwealth Fund papers, which defined underinsured as expending more than 10 percent of income on out-of-pocket health care costs.)

3. In addition to those counted as underinsured, many others individuals might also incur additional costs with improved coverage.

It’s your choice, Senate Finance Committee!